Connection between the Fixed Income Markets and the Forex Market

Currency exchange rates are influenced by the performance of fixed income markets. If a country provides beneficial fixed income markets, they will attract more foreign investments in the country. As a result the demand for the local currency will increase. This will in turn push the price of the currency up.

Additionally, differences in the exchange rates of foreign bonds may indicate a movement in the value of a currency.

Some of the most well developed fixed income and equity markets are found in Europe and the US. Eurodollars, represent assets in US dollars that are placed outside the US borders. Euribors, on the other hand, are products reflecting the short-term interest rates prevalent in Europe. They are of a fixed income character.

Thus, investors tend to sell US assets and buy foreign assets when premiums to Eurodollars are offered by Euribors. As a result, investors will have to purchase more of the foreign currency by the selling of US dollars. This selling of US fixed income or equity assets will have an impact on the exchange rate of the US dollar.

Less yield premium to US assets by Europe will be indicated by a decrease of the positive differentials between Eurodollars and Euribors. Since European assets become less attractive, investors may start to sell the European assets they hold.

In UK the fixed income products are referred to as Gilts. So, if you are about to trade with GBP/USD or EUR/GBP currency pairs, a closer examination of differences between Eurodollars, Euribors and Gilts should be made.

Investors tend to sell GBP assets if the positive interest rate differentials between the UK rates and the other two products' rates start to fall.

However, the USA, UK and Europe should not be your major countries of focus. Yield differentials outside these countries should also be studied.

Finally, the study of fixed income products can give you a general view on the future movements on the foreign currency exchange market. Changes in foreign portfolio investments may reflect a change in forex activity since it will incorporate the execution of different transactions of currencies.

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